Blown Mortgage » Credit

New Credit Card Rules Spells Good News For Debt Relief

Andrew — Wed, 29 Jul 2009 16:17:10 +0000

One of the greatest culprits for serious debt problems are credit cards. Obviously it is our bad use or management of credit cards that causes the debt problems, you can’t blame a gun for what its owner does with it. Nevertheless some guns are more trigger sensitive than others, and it’s not the same to own an automatic machine gun than an air gun. It’s all about understanding the rules of the game and what the real cost of your credit is. The Obama administration have backed the implementation of new credit card rules that will help many of us to save money and stop paying so much of it to the banks in fees and penalties.

What are the new rules?

Raise interest rates on existing balance. This is a great victory for consumers. This is a little known tool banks had in their arsenal of money making methods. In fact most of us probably didn’t know the bank could increase the rate of interest on our credit card without asking. If you think of it that is pretty crazy because the interest rates on credit cards are already huge.

Payments will pay off your most expensive debts first. Borrowers using credit cards, especially when transferring balance from one card to another, can find themselves with different rates of interest for debts on the same card. Previously there was not guideline or rule on which part of the debt banks must use your monthly payments to cover. Obviously banks had an incentive to pay the cheaper interest rates first and leave the most expensive rates to last. With this new credit card rule that will not be a legal course of action for banks that must allow borrowers to pay off their most expensive credit card debt first.

Other cards can’t penalize you for missing a deadline on another cards. We all know that banks are a closed knit community. They might compete against each other but when they are dealing with borrowers data, credit record and payment history they are happy to share their knowledge. They can still share information on delinquent credit card payers but can’t hold it against them.

None of these measures will stop the banking industry from making more and more money on our misuse of credit cards but it has plugged some holes banks will no longer abuse.

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Credit Cards, Debt Relief And Bad Choices

Andrew — Tue, 28 Jul 2009 20:15:28 +0000

Desperate situations elicit desperate measures. Many families are certainly living in desperate situations due to the current worldwide economic crisis with millions of families losing their homes in the U.S alone. These families and households are reaching levels of desperation where any option that provides an ounce of hope or even a temporary respite is considered. What options do they have?

Although there are various viable options open to borrowers in financial difficulties there are also some terrible options open for people that don´t understand the consequences of some of the ”solutions” borrowers provide. An inspiring story that hit the news this week was that of a recently divorced lady that was about to foreclose on her mortgage. Instead of accepting the charity of friends she sold double decker apple pies to friends and neighbors. The story touched many around her world and her business went international in the process saving her from losing her home.

Not all of us can imitate such feats of entrepreneurship but we can all make steps to increase our income and reduce our at least manage our debt. The first financial crouch borrowers seem to grasp for are credit cards. Credit cards are handy financial products that provide quick cash when needed; they are not a useful way of finding money to pay for loans. Paying loans with credit cards is like selling your car to by fuel, not very clever. To illustrate this just have a look at the interest rates credit cards charge, anything between 11% and 19%, even more in some countries and compare it to interest rate of a personal loan, car loan and a mortgage. It is much better to modify or renegotiate your current mortgage, take on a personal loan or even negotiate with you lenders than fall into the slippery slope of credit card debt. Another bad choice is to do nothing when you find you are not going to be able to pay your mortgage or loan payments.

It is vital to talk to your lender and find a solution you both can live with. Many banks and lenders will provide a number of breaks or solutions to borrowers that come out in the open when struggling to meet mortgage or loan payments. For instance if you are waiting for a large sum of money or are expecting a rise in income (that you can prove) lenders are often willing to provide a “payment holiday” for a set amount of time to help you get on your feet. Doing this instead of sticking your head in the ground and just letting things happen also has the benefit of not affecting your credit record which will be destroyed if you simply stop paying your loans. If you are unsure on how to deal with your debt problems be smart and talk to someone that can help you. This website describes some of the steps you can take to alleviate the stress and problems caused by debt and bad management. The choices you make will decide your financial future.

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Debt management, art of making the best of a bad situation

Andrew — Fri, 24 Jul 2009 02:45:03 +0000

Debt management, art of making the best of a bad situation

So you are in serious debt. Really serious debt. You are actually quite desperate because you have no idea how you got in such a pickle and even less of an idea how you are going to get out. Debt management is your newest best friend. What is debt management and how can it help you to get out of debt?
Debt management is the art of taking control of your debt and using the tools at your disposal to minimize the cost and damage of debt. Debt management is not a single solution like a magic pill or a silver bullet, it is more like a way of thinking, an attitude that helps you make the right decisions to get yourself out of serious debt.

Debt management affects our lifestyle, our spending habits and our financial decisions. The principles behind Debt Management are simple: Understand your debt, minimize your debt and control your debt.
This is how it works:

Understand your debt.
You need to know how bad your situation is before you can fix it. Many people develop such a phobia to their debt, they try to ignore it ostrich style, and this obviously creates problems of its own burying the person deeper into debt. So get paper and pen and write out exactly what you owe, that includes your mortgage, credit cards, car loans, everything and include the interest rates you are paying on them.

Minimize your debt.
The second step after understanding your debt is to start to managing your debt by taking decisive action. Your first priority is to work out what your income is and compare it to your monthly expenses. This is where debt management gets really hard. Often people who are in serious debt have got used to spending more than they have and reducing their quality of life or spending habits seems impossible. However you will have to be hard on yourself, get your income and work out a budget that will fit into it. Working out a budget is a living project you will never finish, in you might have to re-design your budget after step 3, the important thing is to realize your limits and stick within them.

Minimize your debt.
There are different ways of minimizing your debt, lets have a look at two.

Debt management tools that will help your minimize your debt include debt consolidation and creating extra income to pay your debt.
Debt consolidation refers to taking on a large loan to pay for a bunch of smaller loans. This can be beneficial because one large loan can mean cheaper monthly payments and a lower interest rate.

You can also try to create some extra cash to pay your mortgage from assets, selling things you no longer need or can do without, redeeming of shares and insurance policies. It is often worth cashing in on an investment that is growing slower than your debt, once your debt is under control you can start to save again.

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Fed study: Obama mortgage plan should give money to borrowers, not banks

Constantine von Hoffman — Tue, 07 Jul 2009 15:21:32 +0000

A study by the Boston Fed has found that the administration’s mortgage rescue plan has failed to provide that all important profit incentive. According to today’s Boston Globe:

Mortgage lenders don’t try to rework most home loans held by borrowers facing foreclosure because it would probably mean losing money.

The Boston Fed’s findings suggest the Obama administration’s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study’s coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

“Loan modification is not profitable for lenders,” Willen said. “If it were profitable, they would go out and hire staff.”

Hard to argue with that logic.

Writing at the WSJ, Stan Liebowitz makes a strong case for the idea that now is exactly not the time for the government to be stepping in and fiddling with the markets.

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house — that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

The difference in policy implications is enormous: A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising.

(Hat tip to the HousingDoom blog)

Leibowitz is hardly a laissez faire type. He just thinks that the economy would be best served by having government do what it should have been doing all along: Requiring, monitoring and enforcing strong underwriter standards.

We are at a crossroads where we can undo the damage to the housing market by strengthening underwriting standards in a reasonable way. But to do so political leaders must face up to the actual causes of the mortgage crisis, not fictitious causes that fit political agendas and election strategies.

Yeah, I’m not holding my breath on that one.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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Deflation is real and it’s spreading

Constantine von Hoffman — Thu, 23 Apr 2009 15:10:50 +0000

So far Spain, Ireland and the UK are already seeing it and Japan is teetering on the brink.

“Ireland, struggling with a ballooning budget deficit and record unemployment, has been at the vanguard of Europe’s economic collapse. Now deflation threatens to push the country deeper into its worst recession in eight decades.” (Bloomberg)
“Britain’s statistics office says the country’s retail price index is falling for the first time in nearly fifty years.” (FoxNews)
“VALENCIA, Spain — Faced with plunging orders, merchants across this recession-wracked country are starting to do something that many of them have never done: cut retail prices.” (NYTimes)
“Japan starts with significantly greater deflation risks” than the U.S. or Europe.” (IMF report via Wall Street Journal)

All of this as the IMF predicts the global economy will shrink for the first time since 1949. The US will provide a fascinating case study on possible causes and effects of deflation. No one really knows what will happen now that we’ve flooded our economy with faux dollars. The standard behavior of more dollars chasing fewer goods is, of course, inflation. A best case scenario for us then is a collision of inflation and deflation — resulting in the ever-dreaded stagflation. I said it was a best case. I didn’t say it was a good case.

My own observation sees more things coming down (housing, clothes, consumer electronics, automobiles) than are going up (food seems to be increasing slightly).

Even more scary news from the UK: “University students could earn, rather than have to pay, interest on their student loans from September now Britain has gone into deflation.” Yes, they will pay you to borrow money. Ouch.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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Rule change lets banks set the value of their own toxic assets

Constantine von Hoffman — Thu, 02 Apr 2009 15:15:12 +0000

The Financial Accounting Standards Board (FASB) has approved a new set of rules allowing financial firms to fiddle with how big their real-estate losses are.

The change is in mark-to-market accounting rules, which say companies must value assets at prices reflecting current market conditions. But now the phrase “current market conditions” will have a big asterisk next to them. Now the assets will be valued at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale. Smoke-and-mirrors has nothing on ink-and-paper.

“The changes … allow companies to use ’significant’ judgment when gauging the price of some investments on their books, including mortgage-backed securities.“

Or, as Lewis Carrol put it in the aptly titled Through The Looking Glass:

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
“The question is”‘ said Alice, “whether you can make words mean so many different things.”

Those in favor of the rule change include Citigroup, Wells Fargo, members of The House and the American Bankers Association. (What a list! It is difficult to think of a group more dedicated to playing “let’s pretend” when it comes to accounting.) They argue forcing banks to mark assets to firesale prices when the markets have gone dormant has fueled the financial crisis through the writedowns, big earnings hits, damage to capital ratios, and a reduced ability to lend. In other words, if you don’t like the reality of the situation just ignore it. Ah, there’s nothing like seeing capitalism in action — the invisible hand of the marketplace being chopped off before it can distribute goods and services at the prices they would actually sell for.

Why is it that we needed strict accounting measures when these assets were inflating the banks’ balance sheets but now that they are deflating those same numbers it is time to change them?

FDIC head Sheila “The Voice of Reason” Bair seems to have her doubts as well: “Banks need to have flexibility” in valuing assets but the fair market rule shouldn’t be scrapped, [she] told a gathering of bank executives Wednesday. “There needs to be integrity in those bank balance sheets.” Wasn’t theeir lack of integrity how this all started?

Here’s my favorite line in the AP story: “Critics say the rule mandates onerous write-downs and saps investor confidence in banks.” There is no confidence left to sap, guys. Coming up with new ways to officially approve your guestimates just proves how justified the lack of confidence is.

While I am unimpressed by the FASB’s lack of a spinal cord, the true blame lies elsewhere for this one:

At a hearing last month, a House panel wrung a pledge from FASB Chairman Robert Herz to try to issue guidelines in three weeks that would relax the mark-to-market rule. The head of the House Financial Services subcommittee, Rep. Paul Kanjorski, D-Pa., had held out the threat of legislation to pressure the standard-setting board to take the steps.

The inmates are now officially in charge of the asylum.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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New game lets you get a bonus and a bailout for screwing up the bank

Constantine von Hoffman — Thu, 26 Mar 2009 13:48:51 +0000

“Crunch, The Game For Utter Bankers” is a card game for anyone with a distinctly gallows sense of humor:

[It] allows you to experience the upside of down. Placed in the role of a global banking CEO, you have to juggle the conflicting demands of your ailing bank and your flourishing bank account. … Each player starts the game with a number of Assets in their bank, a small workforce and a few Trust cards. Trust is essential to your bank’s survival. Not only will capitalism falter without it, but each Trust card hides on the reverse a potential Government Bailout.

This is the latest product from the fine warped folks at TerrorBull Games and – judging by the website — it is as bitter and cynical as their last number: War On Terror: The Board Game.

An average game sees you bribing your way out of government investigations, fending off aggressive takeovers and forcing debt onto the unsuspecting public. Meanwhile, reward your hard work by taking inappropriate bonuses and – when no one’s looking – brazenly embezzling your bank’s own funds and hiding them about your person. Crunch is unique in that to win, players are coaxed into cheating.

Fittingly, the game will hit stores on April 1, but it is NOT a prank.

Full disclosure alert:

I have not played the game yet.
I am being given a free review copy.
The company has wormed its way into my heart by sending a free copy of War On Terror to a friend who is currently deployed in Afghanistan.

That said, if the game is half as fun to play as the website is to read it will be great.

Although the problems inherent in, say, spending over a trillion dollars on a war, while your country’s exports diminish year-on-year, would be apparent to the average school child, somehow everyone seemed caught off guard by this. And, being simple people, we started looking around to find out who to blame. …

Unfortunately, you can’t bomb the economy into shape, so looking for culprits was largely a waste of time. Even when bank bosses finally came under fire, it all felt like a bit of a diversion. Like sitting in an upturned, burning car and taking that moment to try and work out where you went wrong, when the car itself has no breaks, no steering wheel, tyres made out of butter and wood instead of glass for windows. And it’s not even a car, it’s an angry lion on roller skates and you’ve been trying to drive it.

Not sure if this will be as much fun as some tar and feathers – but I have my hopes up.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.He is also an avid board gamer.

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Spike in existing home sales mostly fueled by foreclosures

Constantine von Hoffman — Tue, 24 Mar 2009 01:55:57 +0000

The nearly 500-point dead-cat-bounce on Wall Street yesterday was credited in part to the reported increase in existing home sales. The headline about homes: resales rose 5.1% to a 4.72 million annual rate from 4.49 million in January, via the National Association of Realtors.

The devil rested in the details which showed that 45% of that was firesales from distressed homes. The downside? All that cheap inventory drove all home prices lower.

The large number of these distressed property sales is driving prices lower. The median price for an existing home fell 15.5% last month to $165,400. Falling prices depress demand, contributing to the high inventory that is a factor keeping prices down. Inventories of previously owned homes rose 5.2% at the end of February to 3.8 million available for sale, which represented a supply of 9.7 months at the current sales pace.

So sales went up because of lower prices which is good if you are buying but if, like many of us, you aren’t buying but just watching your home equity diminish then it’s bad.

Even the usually suspect NAR chief economist had to admit this was problematic.

Lawrence Yun: “Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price.”

Given this why did Wall Street react the way it did? Oh, right. The joyous news that the government has released its plan to deal with all those toxic assets. That plan essentially works out to the government bribing investors to buy some of these assets whose worth is unknown save for the fact that it is less today than yesterday — a cycle which is likely to continue for some time to come.

This will in time allow the banks to move these great stinking huge piles of debt off their books and onto … well, who knows. The debt remains. It’s just that now it will be held by someone else. US investors who decide to dive into this risk pool will be in the novel position of essentially paying for it twice. Once with debt created out of thin air by the government — and therefore theoretically to be paid for by taxes — and once with their own money.

I am clearly not smart enough to understand this whole plan. I fervently hope that I am wrong and sometime in the future someone will embarrass me by reminding me of what I had written. I also fervently hope the Cubs will win the series. It’s only been 101 years after all.

Constantine von Hoffman is a veteran business journalist and social media consultant. He write the blog CollateralDamage, a satirical look at marketing and business.

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Fannie Mae execs get bonuses as refinancing volume triples

Jay Hammond — Thu, 19 Mar 2009 16:05:59 +0000

“Borrowers are increasingly taking advantage of the low mortgage rates available in the market today,” said Tom Lund, Executive Vice President, Single-Family Mortgage Business for Fannie Mae and one of four top execs recieving retention bonuses. “We anticipate that volumes will increase even more as millions of additional homeowners become eligible to refinance under the president’s Making Home Affordable plan. Providing broader access to affordabel, sustainable mortgages through expanded refinancing opportunities is a critivcal part of preventing future foreclosures and hastening recovery.”

In fact, so many homeowners have sought lower payments and interest rates that the volume of refinancing loans processed by Fannie Mae in February shot up to more than $41 billion. That’s almost triple the refinancing volume in January and the largest refinancing volume in nearly a year. More than 100,00 borrowers have used Fannie Mae’s online mailbox and 50,000 has contacted their national hotline to ask about their eligibility for refinancing under the Obama Administration’s refinancing plan as well. According to Bankrate, mortage rates fell again this week, with the average 30-year fixed mortgage rate dropping to 5.29 percent, the 15-year fixed mortgage rate declinng to 4.86 percent and the average 1-year adjustible rate mortgage (ARM) pulling back to 5.48 percent.

At least four Fannie Mae executives will not be eleigible for refinancing under the Obama administration’s plan. Although Chief Executive Officer Herbert M. Allison did not take a salary or bonus during 2008, four other executives, including Lund received retention bonuses. The Washington Post reports that Lund, Chief Operating Officer (COO) Michael Williams, deputy Chief Financial Officer (CFO) David Hisey and Kenneth Bacon, who is responsible for housing and community development at Fannie Mae, all received retention bonuses of more than $1 million. CNN and the Associated Press put the figure lower, somewhere between $470,000 and $611,000 for each of the four executives.

Freddie Mac allegedly has a similar bonus plan, however, no figures have yet been released.

Both Fannie Mae and Freddie Mac were bailed out by the federal government in 2008. Both are also seeking additional aid from the government and taxpayers this year. Fannie Mae has requested $15.2 billion while Freddie Mac has asked for nearly $31 billion, according to the Associated Press.

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The simple way to tell the truth from the spin on fixing the banks

Constantine von Hoffman — Tue, 10 Mar 2009 21:25:29 +0000

There’s way more chaff than wheat in the air when it comes to understanding what’s wrong with the banks. Because of this it can be easy to get caught up in jargon and sound-bites and lose track of what the issues really are.

Two National Public Radio entities are doing a superb job at managing the noise-to-signal ratio. One is the show This American Life and the other is the blog/podcast Planet Money (the Planet’s pieces are also heard on regular NPR news shows). The two shows frequently team up and their latest look at the the big picture – entitled Bad Bank — is particularly worth listening to.

In the episode, Adam Davidson and Alex Blumberg explain in an easy-to-understand-without-being-stupid way exactly what went wrong. They also make a strong case for some very simple solutions. Not fun. Not easy. Just simple. These solutions are simple enough that it is also easy to see exactly why no one in power is yet willing to initiate them.

Alex Blumberg: If you want to understand this crisis right now, this banking crisis, you need to understand this one thing. And it’s one thing, Adam, that the mainstream media is afraid to touch.
Adam Davidson: They’re afraid because they think it’s really boring.
Alex Blumberg: Right because, what this central thing is, this thing that we need to discuss right is a bank balance sheet.
Adam Davidson: But please, do not despair, because we think we’ve come up with a way to explain this to you, and we actually think it will be pretty enjoyable. So, to begin, let’s imagine the simplest bank in the world. I would like to call it Adam’s Bank.

The pair then go on to explain the basics of mortgages and how banks work and make a profit in an amusing and interesting way. They do this by using an imaginary mortgage on an imaginary dollhouse and with the help of various experts like Columbia Business School professor David Beim.

Alex Blumberg: David Beim is saying, you don’t want to mark it to market. Mark to market, that’s another phrase you might have heard. And it applies to exactly the situation Adam is in right now. He’s got a dollhouse on his books for 100, but if he had to sell it now, he could only get 50 – that’s the market price, what he could get right now. Marking it to market means Adam would have to enter the market price – 50 dollars – or 20 dollars – or whatever it really is – into his books.
BEIM: And the bankers have all been saying ‘please don’t make me do that,’ because if you do, I’ll be declaring bankruptcy. If I show all those, the reduction from 100 all the way down to 20, you’ve just wiped out my entire capital and more, I’m going to have to go to the government and say, close me down, I’m broke. And bankers find that hard to do. and furthermore, regulators don’t want it to happen to all the banks at once. Certainly not all the big ones.
Alex Blumberg: Now obviously, in the real world, the assets that the banks have on their books are more complicated than dollhouses. But, if the banks had to sell them now, in today’s market, they’d almost certainly take a huge loss. A loss big enough to wipe out their capital and shut them down.

Also helping out is a former IMF economist named Simon Johnson and it is Johnson who lays it all out in language so clear even a politician, CEO or journalist can understand it.

JOHNSON: You know, what would the U.S. tell the IMF to do if this were any country other than the U.S.? If you covered up the name of the country, and just showed me the numbers, just show me the problems, talk to me a little about the politics in a generic way. With the financial system, you have a boom, and then the crash, what would the U.S. tell the IMF to do, I know what we would do, I know what the advice would be, and that would be, take over the banking system. Clean it up, re-privatize it as soon as you can.

Account for the bad debts, throw out the bad management, take the hit and move on. That really is the only way out of this mess. Until that happens – and it doesn’t matter if you call it nationalization or some other euphemism – nothing will change. Keep that in mind when listening to the chattering classes and it becomes quite easy to know when you are being lied to.

Constantine von Hoffman is a veteran business journalist, a social media consultant and author of the blog CollateralDamage, a satirical look at marketing and business.

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